HIGH COURT OF
National Small
Industries Corporation Ltd.
v.
Commissioner of Income-tax
MADAN B. LOKUR
& V.B. GUPTA, JJ.
IT REFERENCE
NO. 57 OF 1988
January 22,
2008
Section 41 of Income-tax Act, 1961 - Remission or cessation
of trading liability - Whether section 41 seeks to bring to tax, sums which
have been allowed as deductions, in respect of loss or expenditure or grading
liability if in subsequent years events have so taken place that there was
reimbursement of loss and expenditure in any manner whatsoever - Held, yes -
Assessee - Corporation was formed by Government of India with main object to
import machinery from abroad on credit and sell such machinery on hire purchase
basis to small scale entrepreneur - Assessee imported a machinery from abroad
and incurred losses due to fluctuation in exchange rates - Government agreed to
bear accumulated exchange losses and assessee received certain amount by way of
reimbursement of said exchange losses - During assessment proceedings assessee
claimed that amount received was on capital account and was not part of trading
operations/receipts - However, Assessing Officer held that amount being
reimbursement of losses suffered, same was taxable as income of assessee under
section 41 - Whether since assessee received reimbursement of losses from
Government incurred by it in course of its business and those losses were
allowed to it as an allowance or deduction in earlier years, reimbursement
constituted assessee’s as income under section 41 and, therefore, same was
taxable - Held, yes
FACTS
The
assessee-corporation was formed by the Government of India with the main object
of assisting and nurturing the small scale sector industries in the
country. Its main function was to import
machinery from abroad on credit and sell such machinery on hire purchase basis
to small scale entrepreneur. The
assessee entered into an agreement with a German Company who advanced the money
to the assessee and the machinery was imported. However, due to fluctuation in
the exchange rates the assessee incurred losses which were accumulated over a
period of seven years commencing from the assessment year 1973-74. The Government agreed to bear the exchange
losses and the assessee received an amount by way of reimbursement of those exchange
losses. During the assessment
proceedings the assessee claimed that the amount received by it was on capital
account and was not a part of its trading operations or receipts. However, the
Assessing Officer held that since the amount was paid in reimbursement of the
losses already suffered by the assessee and the amount was claimed by the
assessee as a deduction in computing the income in those years, entire amount
was taxable as income of assessee under section 41. On appeal, the Commissioner
(Appeals) upheld the order of the Assessing Officer. On second appeal, the
Tribunal confirmed the order of the Commissioner (Appeals).
On reference:
HELD
The
hire purchase agreement placed on record specifically provided that the hirer
(the Small Scale Entrepreneurs) would pay the additional rupees cost because of
exchange variation. When the assessee had received reimbursement of the losses
from the Government, that reimbursement constituted its income under section
41. By whatever name it was called, either subsidy or bounty, the object being
to reimburse the losses, it was the amount received in the assessee’s course of
business and, therefore, taxable. [
Section
41 seeks to bring to tax, sums which have been allowed as deductions, in
respect of loss or expenditure or grading liability if in subsequent years
events have so taken place that there was reimbursement of loss and expenditure in any manner whatsoever In the instant
case, the assessee had received cash in respect of loss or expenditure incurred
by it and was allowed to it as an allowance or deduction in the earlier years.
The reimbursement had nothing to do with the trading liability because in the
transaction, there was no trading liability incurred by the assessee, vis-a-vis,
that amount was concerned. Under those circumstance, it could not be said that
the assessee incurred a trading liability with the German party and therefore,
the amount had been rightly brought to tax under section 41. [
CASE REVIEW:
CIT v. Ruby Rubber Works Ltd. [1989] 178 ITR 181/46
Taxman 1 (Para 13) (Ker.), CIT v. Kanyakumari District Co-operative
Spg Mills Ltd. [2003] 264 ITR 684/128 Taxman 544 (